1 Upside Down 50% to Buy Now

Giving justice to who it is due, City analyst Paul Lejuez predicted this from afar. He lowered the rating Lululemon Athletica (NASDAQ: LULU) in July due to concerns that “the overall product mix is ​​not coherent, is not compelling/exciting to the consumer and appears inconsistent.” He added that “younger brands pose additional risk to (Lululemon’s) sales and margins.”

As expected, the fitness apparel brand’s second-quarter results were hampered by a “product plan that introduced fewer new features,” which resulted in sales that fell short of analysts’ estimates.

Of course, the company’s management remains bullish on the future, even as it lowered its revenue and profit guidance for the full year. As CEO Calvin McDonald explained on the company’s second-quarter earnings conference call, “We are accelerating the introduction of several new styles in 2025 across athletic shorts, tops and tracksuits,” he added, adding that the company “will begin to see the benefits of these strategies in the coming quarters and return to historical newness levels by spring 2025 at the latest.”

This may be so.

There is an even better reason to invest in this ticker, which is currently trading 50% below its late 2023 peak. The bigger, actual the reason Lululemon stock has fallen so much in such a short period of time is about to evaporate. The stock could start to recover even before the process is completely complete, meaning it might be wise to get in sooner rather than later.

The fight is real

The yoga and fitness apparel company has made a few unforced errors recently. The most notable was the release of the Breezethrough leggings, which — in retaliation for a similar blunder in 2013 — were recalled for their uncomfortable, awkward fit. You could also argue that Lululemon underestimated emerging competitors like Vuori, Alo Yoga, and others.

It would also be naive to ignore the fact that even the higher-income households that the sportswear brand typically targets are feeling the effects of inflation. Walmartfor example, he says that most of the market share gains that have been made over the past few years have been largely generated by households earning more than $100,000 a year. This group of people is also looking for ways to stretch their budgets.

The bottom line? Although Lululemon’s second-quarter profits rose 17% year over year to $3.15 per share (versus analyst estimates of $2.93), its top line of $2.37 billion in the latest quarter rose a modest 7%, missing the $2.4 billion expected. Worse, same-store sales growth came in at just 2%, well short of the expected 5.9% pace. Business in the Americas was particularly weak.

The story continues

There’s no relief in the short term, either. Lululemon now projects 2024 earnings of $13.95 to $14.15 per share, down from a previous range of $14.27 to $14.47 per share. Revenue guidance has also been lowered, with the company expecting revenue to grow only 8% to 9% this year.

But despite the grim situation, now is the perfect time to buy Lululemon stock for the long term.

Lululemon is rebuilding its business

That’s not a particularly comfortable idea to swallow right now. After all, Lululemon is lowering its 2024 guidance for a reason. Management isn’t even discussing the prospect of accelerating growth in the second half of this year. The current refocusing is about what might shape up in 2025.

There’s also no denying that the ongoing economic crisis is finally taking its toll on the middle class, which makes up the bulk of Lululemon’s target market. In addition to Walmart’s anecdotal observations, a recent study by the National True Cost of Living Coalition found that 65% of Americans considered middle class say they’re struggling financially right now, with no end in sight.

This comes against the backdrop of record credit card debt among American consumers, with late payments on that debt recently reaching a 13-year high. It’s the kind of environment that can make discretionary spending on high-quality yoga apparel difficult, especially when more affordable and newer alternatives are available.

There are several important details about Lululemon and its stock that may be missing from the market at this time.

The first is that — despite new rivals and the Breezethrough leggings dud — it’s still the top name in the women’s activewear and yoga space. It’s stumbled on the innovation front before and has reclaimed its place as the industry leader each time. The sports shorts, tops, and tracksuits, due out in early 2025, are a credible part of the current rebound plan.

But the tough economy that is now taking a bite out of middle-class budgets? That’s another important detail that interested investors need to understand.

Stocks aren’t priced reactively to headlines and earnings as they’re released. They’re priced predictively, reflecting the company’s likely future. You only have to look at Lululemon’s recent stock history to see that. The stock peaked in late 2023, when the economic environment didn’t seem so bad. Somehow, the market knew what was coming this year, aggressively driving the stock down even before the troubling data started to emerge.

In a similar vein, assuming economic growth is revived next year thanks to upcoming interest rate cuts, Lululemon stock will likely start to recover before an economic rebound becomes obvious.

This could help. Despite all the recent drama and volatility, the analyst community still thinks this ticker is worth buying. The consensus price target is $325.56 per share. That’s 27% higher than Lululemon’s current share price.

Not for everyone, but maybe for you

This isn’t a perfect fit for everyone. Even if it’s undervalued, Lululemon stock is likely to remain volatile for the foreseeable future. It could end up falling significantly from its current price before all is said and done.

But for opportunity-oriented growth investors who can stomach some volatility, the halving of this stock since December is a great opportunity to get into a long-term position at a very low price. The company’s resilience and long-term potential have never been in question, even among its recent critics.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Lululemon Athletica and Walmart. The Motley Fool has a disclosure policy.

1 Growth Stocks Down 50% to Buy Now was originally published by The Motley Fool